You can liquidate all or part of your IRA or other retirement account to give to your church, synagogue or any other charity of choice. However, there are tax consequences and possible penalties that accompany this decision.
IRA Withdrawal Rules
Traditional IRAs allow you to take a tax deduction when you contribute money, but generally, you must pay income taxes when you take out the money. You also pay a 10 percent penalty on any withdrawals prior to age 59 1/2, except when certain conditions apply, as of publication. The IRS makes an exception to the penalty for certain hardships, including disability, death, to avoid eviction or foreclosure, and to pay for medical insurance, including COBRA premiums. Charitable contributions, however, don't qualify for the waiver.
Assuming your church qualifies as a tax-exempt entity under Section 501(c)(3) of the Internal Revenue Code, your tax penalty for withdrawing from an IRA would be mitigated by the tax deduction you can claim for your contribution. However, you must itemize in order to take advantage of the deduction for charitable giving.
Additional Tax Factors
As of 2012, you cannot count the deduction against required-minimum distributions. If you don't take possession of the money but have your IRA transfer it directly to the charity, the IRS treats it just like a tax deduction, subject to the 2 percent threshold for miscellaneous itemized deductions. However, Congress has historically amended the law to exclude amounts distributed from the IRA from individuals' income. If you don't take possession of the money, the 2 percent threshold will not apply.
Once you make a gift to charity, you can't claim it back. Before you draw down your retirement account to make charitable contributions, carefully consider the effect it will have on your retirement security. If you have other assets available that aren't in a tax-advantaged account, it may make more sense to gift these instead. Some people also make use of charitable remainder trusts, or name their favored charity as a beneficiary of a life insurance policy. Others name charities as beneficiaries of their will.
- Nolo's Essential Tax Guide
- Kiplinger's Personal Finance: Don't Transfer IRA Distributions to Charity Yet
- IRS.gov: Publication 590 - Individual Retirement Arrangements
- Planned Giving Design Center: Charitable Remainder Trusts
- AdvisorOne.com: The IRA Charitable Deduction - It's Just a Tax Deduction in 2012
- church. Entrance of a church image by L. Shat from Fotolia.com